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Definition of Return on Average Capital Employed

The term “return on average capital employed” refers to the performance metric that determines how well a company can leverage its capital structure to generate profit. To put it simply, this metric determines the dollar amount that a company is able to produce in net operating profit for each dollar of the capital (both equity and debt) utilized.

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The return on average capital employed is abbreviated as ROACE. This metric is the improved version of ROCE as it takes into account the opening and closing value of the capital employed. ROACE can be used to compare peer performance of a similar scale and with different capital structures as it compares the profitability relative to both equity and debt.

The formula for ROACE can be derived by diving the operating profit or earnings before interest and taxes (EBIT) by the difference between average total assets and average total current liabilities, which is then expressed in terms of percentage. Mathematically, it is represented as,

ROACE = EBIT / (Average Total Assets – Average Total Current Liabilities) * 100

The formula for ROACE can also be expressed as operating profit divided by the summation of average shareholder’s equity and average long term liabilities. Mathematically, it is represented as,

ROACE = EBIT / (Average Shareholder’s Equity + Average Long Term Liabilities) * 100

Examples of Return on Average Capital Employed (With Excel Template)

Let’s take an example to understand the calculation of Return on Average Capital Employed in a better manner.

You can download this Return on Average Capital Employed Excel Template here – Return on Average Capital Employed Excel Template

Example #1

Let us take the example of a company that is engaged in the manufacturing of mobile phone covers. During 2023, the company booked an operating profit of $22.5 million. Its total assets at the start and end of the year were $140 million and $165 million respectively, while its corresponding total current liabilities were $100 million and $120 million respectively. Based on the given information, calculate the ROACE of the company for the year.

Solution:

Average Total Assets is calculated using the formula given below

Average Total Assets = (Total Assets at the Start of the Year + Total Assets at the End of the Year)/2

Average Total Assets = ($140 million + $165 million) / 2

Average Total Assets = $152.5 million

Average Current Liabilities is calculated using the formula given below

Average Current Liabilities = (Total Current Liabilities at the Start of the Year + Total Current Liabilities at the End of the Year) / 2

Average Current Liabilities = ($100 million + $120 million) / 2

Average Current Liabilities = $110.0 million

Return on Average Capital Employed is calculated using the formula given below

ROACE = $22.5 million / ($152.5 million – $110.0 million)

ROACE = 52.94%

Therefore, the company’s ROACE for the year 2023 stood healthy at 52.94%.

Example #2

Let us take the example of Walmart Inc.’s annual report for the year 2023 to illustrate the computation of ROACE. During 2023, its operating income was $20.44 billion, its total assets at the start and at the end of the year was $198.83 billion and $204.52 billion respectively and its total current liabilities at the start and at the end of the year was $66.93 billion and $78.52 billion respectively. Calculate Walmart Inc.’s ROACE for the year 2023.

Solution:

Average Total Assets is calculated using the formula given below

Average Total Assets = (Total Assets at the Start 2023 + Total Assets at the End of 2023) / 2

Average Total Assets = ($198.83 billion + $204.52 billion) / 2

Average Total Assets = $201.68 billion

Average Current Liabilities is calculated using the formula given below

Average Current Liabilities = (Total Current Liabilities at the Start of 2023 + Total Current Liabilities at the End of 2023) / 2

Average Current Liabilities = ($66.93 billion + $78.52 billion) / 2

Average Current Liabilities = $72.73 billion

Return on Average Capital Employed is calculated using the formula given below

ROACE = EBIT / (Average Total Assets – Average Total Current Liabilities) *100

ROACE = $20.44 billion / ($201.68 billion – $72.73 billion)

ROACE = 15.85%

Therefore, Walmart Inc.’s ROACE stood at 15.85% during the year 2023.

Source: Walmart Annual Reports (Investor Relations)

Advantages of Return on Average Capital Employed

It measures the return on both equity and debt.

It is used to compare the profitability of companies with different capital structures.

Limitations of Return on Average Capital Employed

One of the limitations of return on average capital employed is that it can be manipulated through accounting forgery, such as the classification of long-term liabilities as current liabilities.

Conclusion

So, ROACE is an important financial metric that helps in the evaluation of the overall profitability of a company. However, it is also risks of accounting manipulations and so it is essential that you are cautious while analyzing companies based on ROACE.

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This is a guide to Return on Average Capital Employed. Here we discuss how to calculate Return on Average Capital Employed along with practical examples. We also provide a downloadable excel template. You may also look at the following articles to learn more –

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Return On Average Assets Formula

Return on Average Assets Formula

The Formula of Return on Average Assets can be calculated by dividing Company’s Annual Net Income to its Average Total Assets.

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Average Total Assets is calculated using the below formula

In every case, it is not mandatory to have average total assets. In most of the cases return on asset is also used. It is given below.

Generally, banks and other financial institutions utilize a return on average assets to evaluate their performance. It is calculated at period ends, like quarters, years, etc. The return on average assets does not show all the lows and highs. It is, rather, just an average of the period under consideration.

Explanation of Return on Average Assets

A return on average assets ratio is shown as a percentage of all average assets. The return on Average assets ratio often called the return on total assets, is a profitability ratio that calculates the net income produced by total assets during a given period by comparing the net income to the average total assets of the company. In simple words, the ROA or return on assets ratio calculates how efficiently a firm or management of a company can manage its assets to produce profits during a given period. In short, the return on Average assets ratio measures how profitable a firm’s assets are.

Examples of Return on Average Assets Formula

Suppose ABC Company earns $ 4,000 as annual net income while average assets are $40,000.

You can download this Return on Average Assets Template here – Return on Average Assets Template

Return on Average Asset can be calculated as:

Return on Average Asset = (Net income)/(Total Average Asset)

Return on Average Asset = ($ 4,000)/($ 40,000)

Return on Average Asset = 10 %

This indicates that the ABC Company has $0.1 of net income for every dollar of invested assets. Return on assets should be compared with peers in the same industry as a return on assets has stark differences in different industries. So it is wise to compare the return on assets with its peer for a good comparison.

Assume that XYZ company earns a total annual Net Income of $ 100,000 while beginning total assets are $600,000 and ending total assets are $500,000 to calculate Return on Average Assets,

Average Total Assets=(Beginning Total Assets+ Ending Total Assets)/2

The average total assets = ($ 600,000 + $ 500,000) / 2

The average total assets = $ 550,000

According to the Return on Average Assets formula, we get

Return on Average Assets = Net Income / Average Total Assets

Return on Average Assets = $ 100,000 / $ 550,000

Return on Average Assets = 18.18 %

Company XYZ earns 18.18 % on its total assets.

Suppose company ABC & XYZ operates in the same industry. If we compare company ABC & company XYZ, company XYZ utilizes its assets more efficiently than company ABC. As company XYZ has more earnings on assets than company ABC. As an investment analyst, investing in a company that utilizes its assets efficiently makes more sense.

Significance and Use of Return on Average Assets Formula

The return on Average Assets formula is an indicator that helps to assess how profitable a company is relative to its total annual assets. Return on Average Assets is a type of Return on investments, so it helps to indicate a company’s performance. Return on Average Assets gives an idea to an analyst, investors, and managers of how efficiently management uses its assets to improve earnings. It generates the profitability of a business in relation to its total annual assets.

Return on Average Assets shows how efficiently management or a company can convert the money used to purchase total assets into profits or net income. It makes sense that a higher ratio is more favorable to the management and investors because it shows that the firm is more effectively operating its assets to produce greater amounts of net profit. For the management, the return on Average Assets ratio is also important because the ratio can tell a lot about the firm’s performance; and by comparing the ratio with similar companies under one industry, management should be able to understand how well the firm is doing.

Return on Average Assets Calculator

You can use the following Return on Average Assets Calculator

Annual Total Income Average Total Assets Return on Average Assets Formula   Return on Average Assets Formula = Annual Total Income =

Average Total Assets

0

= 0

0

Return on Average Assets Formula in Excel (With Excel Template)

Here we will do the same example of the Return on Average Assets formula in Excel. It is very easy and simple. You need to provide the three inputs i.e. Net Income and Total Average Asset.

In the First Example, We calculate the Return on Average Assets using Formula

In the Second Example

first, we calculate the Average total assets.

Then, we calculate the Return on Average Assets using Formula

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This has been a guide to a Return on Average Assets formula. Here we discuss its uses along with practical examples. We also provide you with Return on Average Assets Calculator with a downloadable Excel template. You may also look at the following articles to learn more –

Contributed Capital Vs Common Stock

What is Contributed Capital?

Contributed Capital is defined as the capital which are in the form of liquid assets and cash as given by the shareholders in return of the ownership of the stock. They are also regarded as paid-in capital.

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Explanation

Investors who generally make contributions of capital, they take up the equity issues in return. The shareholders here purchase the stock basis the price quoted for each stock by the business. Investors, therefore, make contributions of capital if they are willing to purchase the stock at the price quoted by the business.

How to Calculate Contributed Capital?

The contributed capital is calculated as the sum of the value of the common stock that the business issued and the additional paid in capital. It is represented as per the formula described below: –

Contributed Capital = Par Value of Common Stock + Additional Paid-In Capital

The first step to determine the contributed capital would be to determine the effective par value of the stock. This is the amount that the business would quote to the investors when going to the financial market. The next step would be the determination of additional paid-in capital which the investors normally pay over and above the par value of the common stock to the business. As the last step, the contributed capital would be determined as the sum of the common stock and the additional paid-in capital.

Example of Contributed Capital

Suppose the business issued 1,000 common stock having a price of $10 per share. When the business went to the primary market, the business was able to procure $120,000 on the issuance of the stock. Help the management determine the additional paid in capital and contributed capital.

Solution:

Management raised $120,000 from the primary market. This amount would be regarded as the contributed capital of the business. The additional paid in the capital would be the difference of the contributed capital and the par value of the stock.

Par Value of the Stock = Number of Shares * Par Value

Par Value of the Stock = 1,000 x $10

Par Value of the Stock = $10,000

additional paid-in capital is calculated as:

Additional Paid-In Capital = Contributed Capital – Par Value of the Stock

Additional Paid-In Capital = $120,000 – $10,000

Additional Paid-In Capital =$110,000

Hence the business has additional capital of $110, 000 and contributed capital of $120,000 respectively.

Contributed Capital Components

The contributed capital has two broad components namely common stock and additional paid-in capital. The contributed capital therefore can be computed as the sum of common stock and additional paid-in capital. The common stock therefore is defined as the financial instrument that are expressed in terms of value of par corresponding to the number of issued stocks. The additional paid-in capital for the business is defined as money that is given by the share holders which is over and above the par value of the stock.

Contributed Capital on Balance Sheet Importance of Contributed Capital

The contributed capital is recorded when the business goes for initial public offering. The paid-in capital is then determined basis the amount of stock that is sold to the investors directly. Therefore, any transactions of trades that happens in the secondary market with respect to the stocks are not recorded as the contributed capital. The contributed capital is important because it shows the excess amount the business gets over and above the par value of the stock.

Contributed Capital vs Common Stock

Common stocks are normally issued at the par value by the business. Each common stock would have a par value which the investors purchase. The value reported under the account for the common stock forms the part of the contributed capital. Therefore, the contributed capital could be the sum of the common stock and the corresponding paid-in capital where the paid-in capital would represent amount of capital that the investors pay to the business that is over and above the par value of the stock.

Advantages of Contributed Capital

There is no burden on the fixed payment wherein the amount that is received from the investors have no fixed or compulsory obligations of the payment. There are no interest payments that the business has to normally pay when issuing other sources of capital.

If the business earns good profits, the business then distributes the profits in the form of dividends. In the event if the business is not able to generate suitable profits then the business is liable to make dividend payments to the business.

The business does not have to pledge any security in the form of collateral which the business has to give if in case it is raising finance through debt. The money raised through contributed capital does not pledges any existing securities and assets which the business may have to do in case the finance is raised through debt.

If the money raised through contributed capital is used to purchase a tangible asset then the tangible asset could be further used for pledging purpose when the business is looking to raise more finance in the form of debt.

Since there is a high risk from such investment, the investors expect to earn high rate of return.

For the investors, the contributed capital does not offer much benefits as the profits, growth and dividends from the business depends upon the performance of the business and the returns earned remains to be uncertain.

The returns earned from the contributed capital are not similar to the returns earned from taking up the debt issues by the business.

The investors who invest through the contributed capital have the right to select the board of directors as well as they approve critical business decisions. Due to this feature, results in dilution in terms of ownership and control.

Since the ownership is diluted, there is an appreciation in the oversight level of the management related decisions.

Conclusion

The contributed capital is described in term of the common stock and additional paid-in capital of the business. It describes the amount that the business gathers through the means of issuing stocks to the prospective stockholders and is described in the form of the equity investment as made by the stockholders of the business. The investors procure shares from the business in exchange of cash or liquid assets they own. The business may issue stock and gather finance to pay off the existing debt of the business. With high contributed capital, the business raises the level of equity investment which in turn dilutes the ownership of existing stockholders.

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Equity Capital Markets (Ecm) Banker Career Profile

Equity Capital Markets (ECM) Banker Career Profile

Discover what it takes to embark on a career path of an ECM banker

Written by

Andrew Loo

Published March 31, 2023

Updated July 7, 2023

What is an Equity Capital Markets Banker?

In most cases, an investment banker would be the first to identify the opportunity for their client to raise capital in the equity markets and would then call in someone who specializes in stocks, the ECM banker, to help close the deal with the client and earn fees for the bank.

Since the ECM banker must be an expert in equity origination, most Wall Street banks operate their ECM departments as joint venture (JV) between the equity capital markets and investment banking divisions (IBD).

The Role of an Equity Capital Markets Banker

Investment banks employ ECM teams that are responsible for the origination, structuring, execution, and syndication of various equity-related products. 

ECM bankers are specialists brought in by the IBD coverage banker to help assist with issuers on three main tasks:

Assessing the issuer’s needs for an

IPO

or follow-on offerings;

Analyzing

shareholders

’ needs and recent preferences, including crossholdings and shareholder momentum; and

Assessing the general equity market environment in order to make a deal work for both parties, including trading flow.

On the investors’ side, ECM bankers must gauge several factors, including:

Overall investor appetite to equity markets and exposure to certain issuers/industries;

The preferred structure, market, currency and size of a potential equity capital issuance;

The risk tolerance and investment mandate of the investor; and

The price that would make it attractive for investors to participate.

On the other side of the deal, the equity capital issuer’s needs must be assessed, including:

Any regulatory requirements that may impede their ability to issue equity capital;

The uses of the equity capital;

The amount that the issuer wants to raise versus how much can be supported;

The ideal structure of the equity capital and any possible FX or interest rate hedges, especially in convertible bond issuance; and

Any opportunities to restructure or refinance for better terms to the borrower.

ECM bankers must also have their fingers on the pulse of the equity markets. This means a lot of competitive research and study about similar companies that have raised equity recently, called comparables or “comps” for short. 

In addition to IPOs, ECM bankers may also work on other types of deals, such as:

Follow-on offerings (FO) – these are additional equity capital raises after an IPO and are faster and easier to execute. A lot of times, these FOs are confidentially targeted at specific investors or accelerated bookbuilds;

Secondary offering – where one group of investors sell its shares to another group;

At-the-market – whereby the company issues shares over the course of days or weeks gradually at prevailing market prices;

Rights offerings – where ECM works with

sales and trading

(S&T) to market additional shares to existing shareholders based on their subscription rights; and

Block trades – ECM will work with S&T to buy large blocks of issued stock from a client to resell to other investors. These trades involve the bank taking the stocks onto their own balance sheet and carries more risk.

How are Roles in ECM Organized? MNPI and Chinese Walls

The first thing to understand about a ECM banker is that they have access to and deal with material non-public information. As such, ECM bankers are required to work in a separate area from their sales and trading colleagues on the equity trading floor. These areas tend to be enclosed in glass walls, so sometimes are affectionately referred to as a “glass bowl.”

There are also strict internal controls, called Chinese Walls, that govern the interactions between ECM bankers with private information and S&T colleagues that should only have access to public information. These may take the form of email and chat restrictions, sometimes even restricting the use of cell phones so that all conversations are recorded on work phone lines to ensure that MNPI doesn’t get into the open.  

Subgroups

In terms of structure, ECM bankers at some firms are lightly structured by industry group to provide some measure of specialization and accountability but more often are aligned by job function.  

A coverage banker in the IBD team will call on the client together with an ECM banker when there is a potential equity transaction to discuss. Colleagues in this area of ECM belong in what is generally called the equity origination team.

Syndicate manager

There are also colleagues in ECM who straddle the Chinese Wall and handle the actual book running with the salespeople and traders to decide on the final pricing, deal size and timing to ensure a successful transaction for both the borrower and investors. These people are called equity syndicate managers. Syndicate managers are also responsible for working together with syndicate managers in other investment banks who are involved in the deal.

Convertible/equity-linked bonds

Convertible bond (CB) or other equity-linked bond issuance are technically bond issuances but have provisions to convert the debt under certain circumstances. These instruments fall into the remit of ECM.

Private placement

Another subgroup might be private placement teams within ECM who deal specifically with targeted deals where equity capital is sold to a small group of investors, such as VCs, PE firms, and hedge funds. This group may also work on secondary offerings and block trades.

How do ECM Bankers Make Money for the Investment Bank?

ECM bankers make fees, called origination fees, for successful equity capital raises. In most cases, it is unlikely that one single investment bank will lead an IPO as an issuer is likely to appoint (or mandate) more than one firm for relationship and diversification purposes. The fees earned depend on the level of involvement of that bank, ranging from the highest fees paid to bookrunners to lower fees paid to co-managers.

In private placements, block trades, and secondary offerings, fees are often higher but these deals are not as common as pure origination deals.

For CB and rights offering deals, there are also very lucrative interest rate swaps and other derivatives that help hedge risks for the issuer or help to reduce the funding cost of the bond part of the transaction.

Regardless of how the revenues are earned, the fees are split according to the terms of the JV between IBD and the equities division, most commonly 50/50.

League table What Makes Someone Successful as an ECM Banker?

As is the case with most jobs working in an investment bank on the sell-side, success is determined by how much revenue you bring in to the firm. Unsurprisingly, this means that roles within ECM tend to be pressure-packed and intense.

Firstly, an individual needs to be very well-versed in accounting, equity value and enterprise value, valuation approaches, DCF analysis, and transaction modeling. While the models might be lighter than say, an investment banker might use day-to-day, they tend to be quite sophisticated.

Secondly, they must have a keen attention to detail. Not only is the ECM individual’s own reputation at stake, but any mistakes will also look bad for the IBD banker and the entire firm as a whole. As many IPO transactions require registration with securities and market regulators, such as the US SEC, ECM bankers must make sure (with the help of legal) that documents are perfect. So whether it comes to models, pitchbooks, equity commitment memorandums, sales memos, or registration documents, mistakes are not tolerated.

Typical Job Duties for an ECM Banker

On a typical day, ECM bankers start their day early, but not necessarily as early as sales and trading. The first thing to do is to review overnight news and trades, then begin to start their daily work.

If they have a live deal on the go, days can be filled with intense discussions with other bookrunners, investors, and sales and traders, which sometimes stretch very late into the night to coordinate with other time zones. ECM bankers also have stressful and difficult negotiations with issuers, oftentimes dealing with other cutthroat bookrunners and competitors trying to undermine them with the client.

When there are no live deals on the go, ECM bankers may get a bit of downtime, so their day might end at 6 or 7 p.m. But overall, work/life balance is not easy for ECM bankers as the hours demanded tend to fluctuate.  

What is the Difference Between ECM and IBD?

While IBD bankers tend to work on M&A primarily, ECM bankers are more specialized and will work only on equity deals. In this regard, they are much closer to the equity markets than their colleagues in IBD.

Also, IBD bankers tend to be laser-focused on one specific industry, where ECM bankers might only loosely be aligned in that fashion, working across multiple industries.

Lastly, ECM bankers work on deals that happen much more commonly than, say, a merger deal for IBD.

Compensation Factors and Salary Expectations in Equity Capital Markets

With this extremely intense work, it is perhaps no surprise that compensation for equity capital markets bankers is very lucrative. The compensation is based on performance, so ECM bankers have a “eat what you kill” mindset.  

Compensation is broken down into a base salary and a year-end bonus. As is the case with most jobs in the financial industry, experience is typically associated with higher pay. Year-end bonuses can be many multiples of the annual base pay.  

Competition between banks for good ECM bankers is also quite high, with bankers being actively poached and moving between firms a common sight.

Job Qualifications for ECM Bankers

Roles in ECM bankers are highly sought-after by those who have the right skills. To become an equity capital markets banker, there are specific licensing courses and regulatory exams one must pass. For example, in the United States, you need to pass the Series 7 and Series 63 exams.

New ECM associates are frequently recruited from highly sought-after undergraduate programs across the globe. If a new analyst (undergraduate degree) or associate (graduate degree) performs well during the year, they can expect to be promoted and continue their career path toward vice president, executive director, and, ultimately, managing director. 

ECM is very much a “learning through doing” type of career, and those who do well can achieve incredible successes. Career mobility is often determined by one’s ability to generate fees or based on the strength of relationship with borrowers/investors.

Italy Seeks Return Of Artworks

Italy seeks return of artworks Archaeology professor says MFA may have to deal

In 1998, CAS Archaeology Professor Clemency Coggins received a medal (foreground) from the Archaeological Institute of America in recognition of almost three decades of working to prevent the looting of artifacts. Photo by Kalman Zabarsky

Boston’s Museum of Fine Arts should be prepared to part with more than two dozen artifacts if Italian authorities can prove they were stolen, says Clemency Coggins, a College of Arts and Sciences professor of archaeology, who has fought illicit trade in the antiquities market for more than three decades.

The artistic heritage division of Italy’s national police force announced two weeks ago that it was sending representatives to Boston later this month to try to persuade the MFA to return artifacts that it believes were unearthed during unauthorized digs. The announcement of the trip came the day after the Metropolitan Museum in New York struck a deal with the same police division to return 21 looted objects to Italy in exchange for long-term loans of artifacts from Italian museums. Among the items the Met has agreed to send back are the Euphronios Krater, a 2,500-year-old 12-gallon Greek vase, and the Morgantina Treasure, a third-century silver collection from Sicily.

Coggins believes that it would be wise for the MFA to work out a similar agreement if there is strong evidence that the relics in question were illegally removed from Italy.

“The MFA should certainly make some returns and negotiate some loans,” says Coggins, who received an award from the Archaeological Institute of America (AIA) in 1998 for her efforts to prevent the looting of archaeological artifacts.

The mission of the Italian authorities — who will be accompanied by U.S. Immigration and Customs Enforcement agents — is part of a broad crackdown by the Italian government on American museums that have acquired stolen artifacts. Prosecutors probing a smuggling operation in Rome contend that the J. Paul Getty Museum in Los Angeles knowingly accepted looted antiquities. Investigation of that case led authorities to a Swiss warehouse, where they seized photographs of what they believe are a plundered statue, vase, and jar now housed at the MFA. Prosecutors have compiled a list of 29 objects they say the MFA obtained illegally.

Coggins has long criticized the MFA’s acquisition policies; she has cited concerns about the museum’s collection of Maya jade, burial urns, and other pottery. She says that the items were likely stolen from ancient grave sites and that relics are being plundered at alarming rates around the world. “The looting of colonial art from Latin American countries is much worse than ever,” says Coggins.

She describes the antiquities market as “a major unregulated industry, where secrecy is taken for granted.” Although the Association of Art Museum Directors (AAMD) issued new guidelines last month on the acquisitions of archaeological artifacts and ancient artworks, the AIA, which is based at BU, recently issued a statement describing the document’s shortcomings. The association has proposed a new set of principles on museum acquisitions, including the establishment of a written policy for curatorial staff and stressing due diligence in verifying objects’ documentation.

Not every object of questionable provenance in U.S. museums is in jeopardy of being returned to its country of origin, Coggins points out. It wasn’t until 1983 that the United States passed a law prohibiting acquisitions of objects without proper export papers. And while the Met bought the Euphronios Krater in 1972 — more than a decade before the U.S. legislation — Coggins reminds us that the Italian police had irrefutable evidence that the vase was looted from a tomb north of Rome.

Coggins is well known for her efforts to see that major U.S. museums take a leadership role in toughening acquisition standards. “The critical thing is that museums be transparent,” she says. “We need full disclosure of all acquisition records, and even correspondence.”

The Italian authorities, who tout their deal with the Met as a model for other museums, have said that the MFA is just one of their targets. Should other Boston-area museums possessing objects with questionable documentation be concerned with this precedent-setting agreement?

“Yes,” says Coggins, “but the MFA is in the worst position.”

Explore Related Topics:

Calculating Weighted Average In Excel (Using Formulas)

When we calculate a simple average of a given set of values, the assumption is that all the values carry an equal weight or importance.

For example, if you appear for exams and all the exams carry a similar weight, then the average of your total marks would also be the weighted average of your scores.

However, in real life, this is hardly the case.

Some tasks are always more important than the others. Some exams are more important than the others.

And that’s where Weighted Average comes into the picture.

Here is the textbook definition of Weighted Average:

Now let’s see how to calculate the Weighted Average in Excel.

In this tutorial, you’ll learn how to calculate the weighted average in Excel:

Using the SUMPRODUCT function.

Using the SUM function.

So let’s get started.

There could be various scenarios where you need to calculate the weighted average. Below are three different situations where you can use the SUMPRODUCT function to calculate weighted average in Excel

Below are three different situations where you can use the SUMPRODUCT function to calculate weighted average in Excel

Suppose you have a dataset with marks scored by a student in different exams along with the weights in percentages (as shown below):

In the above data, a student gets marks in different evaluations, but in the end, needs to be given a final score or grade. A simple average can not be calculated here as the importance of different evaluations vary.

For example, a quiz, with a weight of 10% carries twice the weight as compared with an assignment, but one-fourth the weight as compared with the Exam.

In such a case, you can use the SUMPRODUCT function to get the weighted average of the score.

Here is the formula that will give you the weighted average in Excel:

=SUMPRODUCT(B2:B8,C2:C8)

Here is how this formula works: Excel SUMPRODUCT function multiplies the first element of the first array with the first element of the second array. Then it multiplies the second element of the first array with the second element of the second array. And so on..

And finally, it adds all these values.

Here is an illustration to make it clear.

In the above case, the weights were assigned in such a way that the total added up to 100%. But in real life scenarios, it may not always be the case.

Let’s have a look at the same example with different weights.

In the above case, the weights add up to 200%.

If I use the same SUMPRODUCT formula, it will give me the wrong result.

In the above result, I have doubled all the weights, and it returns the weighted average value as 153.2. Now we know a student can’t get more than 100 out of 100, no matter how brilliant he/she is.

The reason for this is that the weights don’t add up to 100%.

Here is the formula that will get this sorted:

=SUMPRODUCT(B2:B8,C2:C8)/SUM(C2:C8)

In the above formula, the SUMPRODUCT result is divided by the sum of all the weights. Hence, no matter what, the weights would always add up to 100%.

One practical example of different weights is when businesses calculate the weighted average cost of capital . For example, if a company has raised capital using debt, equity, and preferred stock, then these will be serviced at a different cost. The company’s accounting team then calculates the weighted average cost of capital that represents the cost of capital for the entire company.

Also read: How to Calculate Percentage Increase in Excel

In the example covered so far, the weights were specified. However, there may be cases, where the weights are not directly available, and you need to calculate the weights first and then calculate the weighted average.

Suppose you are selling three different types of products as mentioned below:

You can calculate the weighted average price per product by using the SUMPRODUCT function. Here is the formula you can use:

=SUMPRODUCT(B2:B4,C2:C4)/SUM(B2:B4)

Dividing the SUMPRODUCT result with the SUM of quantities makes sure that the weights (in this case, quantities) add up to 100%.

While the SUMPRODUCT function is the best way to calculate the weighted average in Excel, you can also use the SUM function.

To calculate the weighted average using the SUM function, you need to multiply each element, with its assigned importance in percentage.

Using the same dataset:

Here the formula that will give you the right result:

=SUM(B2*C2,B3*C3,B4*C4,B5*C5,B6*C6,B7*C7,B8*C8)

This method is alright to use when you have a couple of items. But when you have many items and weights, this method could be cumbersome and error-prone. There is shorter and better way of doing this using the SUM function.

Continuing with the same data set, here is the short formula that will give you the weighted average using the SUM function:

=SUM(B2:B8*C2:C8)

The trick while using this formula is to use Control + Shift + Enter, instead of just using Enter. Since SUM function can not handle arrays, you need to use Control + Shift + Enter.

When you hit Control + Shift + Enter, you would see curly brackets appear automatically at the beginning and the end of the formula (see the formula bar in the above image).

Again, make sure the weights add up to 100%. If it does not, you need to divide the result by the sum of the weights (as shown below, taking the product example):

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